Against the Grain

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Long on WWE, Round 2…

It has been a while since my last post. The market keeps going up, the economy is adding jobs, and the threat of interest rates rising is increasing. All these things make me more nervous about the market. As a result we are back to focusing on under-performers, forgotten names, or perhaps out of favor brands. I discussed World Wrestling Entertainment (WWE) a while back. It was an out of favor brand that started to build some high expectations, only to come crashing right back to its out-of-favor price point. (The stock went from 12 to 30 and back down to 12 in a couple of months.) So let’s revisit it:

At this price point I think WWE is back to being out of favor. The two catalysts for its brief rise and fall were a TV contract renewal and subscriber figures for the WWE online network. Expectations for both were high, and reality was a cruel mistress. So back to the basics. The dividend is 4% a year. With massive insider ownership, I see them protecting the payout as that’s how management can continue to take money out of the business. Management has not had a great track record- a juiced-up Vince McMahon promises a wild ride. They have plowed money into numerous dead end ventures (XFL anyone?). But WWE is the really the only large scale wrestling brand around. While I have passed my wrestling phase (it lasted through college, don’t judge), that doesn’t mean they don’t have a large fan base here in the states.

They continue to produce media stars every few years, with the Rock being the pinnacle of their branding success. And yet they continue to fail at leveraging this star power into consistent earnings. WWE also rolled out their own movie division that produced movies starring their talent. (It was a bust, not XFL level, but a bust.) Revenue for the company is growing at low single digits, which is nothing to brag about. And they are expecting a net loss this year as they transition to online delivery from one off pay-per-views.

So what’s the good news? They have almost no debt (~$30 million), expectations are low, and they trade at 14-15x next year’s earnings per share (EPS). It’s a long tenured brand and consistently a top ten cable program. And while I own it I can collect a nice little dividend. If subscriber numbers creep forward or cost cutting exceeds expectations I’ve seen the impact a little hype can have on the stock price.

We’ll start small but ATG is initiating a position in WWE. Hopefully we won’t get body slammed*.